Tuesday, 8 November 2016

One chart that shows how worried the markets are about Donald Trump winning

Markets are worried about a Donald Trump presidency, writes economist Eric Zitzewitz. When news breaks that’s good for Donald Trump, the stock market falls; when he does poorly, markets rise.

One of the most dramatic examples of this happened on October 28, when FBI Director James Comey sent a letter to Congress saying the FBI was restarting its investigation of Hillary Clinton’s emails (that investigation wrapped up on Sunday). Within minutes, the stock market plunged:
The purple line shows the performance of the stock market on the day the news broke. And Zitzewitz, working with another economist, Justin Wolfers, did something clever: He superimposed the stock market chart with a chart showing how Hillary Clinton’s election chances changed on betting markets. As you can see, the two markets moved together: As bettors became more skeptical of Clinton’s election chances, stock market traders pushed stock prices downward.

This isn’t an isolated incident, Zitzewitz argues. You can see similar patterns the day of the first presidential debate — which Clinton was generally viewed as winning — and Comey’s Sunday announcement that he was wrapping up his investigation of Clinton’s email scandal. In both cases, this good news for Clinton was followed by stock market rallies.

And that’s not all; Zitzewitz and Wolfers have found that a number of other market indicators also saw significant shifts during significant events. The Mexican peso has been particularly volatile, presumably reflecting the expectation that President Trump would try to reduce trade between the United States and Mexico. That would likely hurt both economies, but as the smaller and poorer country, Mexico is likely to be hurt more.

By extrapolating from these relatively small change zitzewitz estimates that the stock market market under Hillary Clinton would be 12 to 16 percent higher than the stock market under Donald Trump. Markets currently expect a Clinton win, so when that is confirmed, we’re likely to see only a small bounce. In contrast, a surprise Trump victory could trigger a double-digit decline in stock prices.

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